Enhanced compensation

Enhanced compensation on compulsory acquisition is exempt from capital gain tax. Also interest received on enhanced compensation is exempt as it is a part of the enhanced compensation. So your client will receive the refund of TDS

Circular No. 36 of 2016
F.No. 225/S8/2016-ITA.II
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
Dated: 25th October, 2016
Subject: Taxability of the compensation received by the land owners for the land acquired
under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation
and Resettlement Act, 2013 ('RFCTLAAR Act')-reg.
Under the existing provisions of the Income-tax Act 1961 ('the Act'), an agricultural land which is not situated in specified urban area, is not regarded as a capital asset Hence, capital gains arising from the transfer (including compulsory acquisition] of such agricultural land is not taxable. Finance (No, 2] Act, 2004 inserted section 10(37) in the Act from 01.04.2005 to provide specific exemption to the
capital gains arising to an Individual or a HUF from compulsory acquisition of an agricultural land situated in specified urban limit, subject to fulfilment of certain conditions. Therefore, compensation received from compulsory acquisition of an agricultural land is not taxable under the Act (subject to fulfilment of certain conditions for specified urban land).
2. The RFCTLARR Act which came into effect from 1st January, 2014, in section 96, inter alia
provides that income-tax shall not be levied on any award or agreement made [except those made under section 46) under the RFCTLARR Act Therefore, compensation received for compulsory acquisition of land under the RFCTLARR Act (except those made under section 46 of RFCTLARR Act), is exempted from the levy of income-tax.
3. As no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income-tax under the RFCTLARR Act, the exemption provided under section 96 of the RFCTLARR Act is wider
in scope than the tax-exemption provided under the existing provisions of Income-tax Act, 1961. This has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land, especially those relating to acquisition of non-agricultural land. The matter has been examined by the Board and it is hereby clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the provisions of income-tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income-tax Act, 1961.
4. The above may be brought to the notice of all concerned.
5. Hindi version of the order shall follow.
(Rohit Garg)
Deputy Secretary to the Govt. of India

Dear Sir

I read the above discussions and understood that the Compensation or enhanced compensation on the Land acquired by the Government or through its undertakings are exempt by operation of section 96 of RFCTLARR Act, 2013 which overrules the provisions of Income Tax Act, 1961. However, there is a consequent amendment in Finance Act, 2017 in Section 194 LA through insertion of section proviso, exempting the deduction of tax at source. But this is in relation to the value of the land agreed as per the Award by the entity or as enhanced by the competent court in this regard. 

The Interest on the enhanced compensation for the period, is different from the value of land received as consideration on compulsory acquisition. The Interest is an additional benefit which is earned and subject to tax under section 56(2)(viii) of the Income tax act, 1961 read with Section 145 B (1) of the same Act. 

 

Both these section discusses on the interest received in an enhanced compensation or delay in remittance of compensation as per the award, shall be offered to tax at the rates applicable and even the TDS is applicable at the rates as per the Chaper XVII B.

 

Therefore, the Interest is subject to tax and cannot be claimed as exempt under Income Tax Act, 1961.

 

If there are any contradictory decisions or observations, the same may be posted for the benefit of the members here. 

 

Regards

CA Anandd Babunath

Chennai

what is the tax treatment of solatium, Interest under Section 23(1A) and Interest under Section 28?

AS I DISCUSSED AND GET INFORMATION  FROM CONSULTANT AND FROM LAND ACQUISITION DEPARTMENT THE PART OF INTEREST IS FULLY EXEMPT WHEN IT IS IN  SECTION 28 OF LAND ACQUISITION ACT  & INTEREST RECEIVED IN SECTION 34 OF LAND ACQUISITION ACT IS 50% EXEMPT IN SECTION 57 OF INCOME TAX ACT.

THANKS FOR THE RESEARCH.  

Correct. Similar case is decided by Chandigarh ITAT making out difference between land acquired under section 28 and section 34. In section 28 award is given by court and the interest is exempt being part of compensation.